Chapter 6 Supply Chain
Supplier of choice
-Achieved a specific and exceptional "level of performance" over time as measured by a set of criteria agreed upon by both buyer and supplier. - Typically a "trusted partners" who know the buyers organization, processes, procedures, and requirements. - Provides a "higher value" than their competitors and are characterized as reliable, responsive, flexible, and cost effective.
Steps for conducting spend analysis
1. Define scope 2. Identify data sources 3. Gather data into one database 4. Cleansing the data and standardizing for easy review 5. Categorizing data 6. Analyzing data for best deals, ensure purchases are from preferred supplier, reduce number of suppliers per category 7. Repeat on regular schedule
- potential to "increase revenue and profits" for both parties -potential to create competitive advantage - mitigate risks and ensure a continuity of supply - partners for future strategic opportunities
Benefits of Strategic Alliances
Rationalized supply base
Buyer Supplier partnerships are easier to manage with a ____________________
Supplier code of conduct, specific provisions within supplier agreements about ethical sourcing, find how all goods originate, knowledge of workplace principles, independent verification of supplier compliance of ethical standards, ethics part of supplier performance rating system, report supplier compliance to stakeholders
Ethical policies should include
classify as innovative or functional, develop goals/strategies, create sourcing team, develop strategy and communication plan, spend analysis, supplier capabilities using RFI, supplier portfolio, future state of company, supplier selection and negotiation, supplier relationship management SRM
Framework for Sourcing Strategy Development
Multisourced: reliable, low-cost suppliers
Functional Products strategy
1. total historic expenditures and volumes 2. Future demand projections or budgets 3. expenditures categorized by commodity and subcommodity 4. exp. by divisions, dept, or user 5. exp. by supplier
Key areas of a typical spend analysis
Functional products
MRO items/commonly low profit margin items with relatively stable demands and high levels of competition
Sole Sourced
Only one supplier for an item Not a sourcing strategy because not a choice, and company cannot negotiate price or service
Sourcing
Process of identifying a company that provides a needed good/service
establish good relationship, less quality variability, lower cost, transportation economies, proprietary product/process, volume too small to split
Reasons for Single Supplier
cross-functional team
Supplier selection is conducted by
Vendor Managed Inventory (VMI)
Suppliers directly manage buyer inventories to reduce the buyer's inventory carrying costs and avoid stock outs for the buyer
Two main ethical approaches
Utilitarianism and Rights/Duties
Sustainability
ability to meet current needs of supply chain without hindering ability to meet future needs in terms of economic, social, and environmental challenges
Value-to-price relationship
achieve cost reductions while maintaining or improving quality/service
Successful Sourcing Strategies are almost always different for:
functional products vs. innovative products
Utilitarianism
greatest good for greatest number of people
high-level sourcing strategies include:
insourcing and outsourcing
Business Ethics
the application of ethical principles to business
Corporate Social Responsibility
the practice of business ethics
Supply Base
The group of suppliers from which a company acquires goods and services. Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller _________________.
Strategic Alliance Development
an extension of supplier development which refers to increasing a key or strategic supplier's "capabilities." Results in better market penetration, access to new tech/knowledge, and higher ROI Eventually extends to a firm's second-tier suppliers as the firm's key suppliers begin to form their own alliances
Co-managed inventory (CMI)
arrangement where a specific quantity of an item is stored at the buyer's location
Ethical sourcing
attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior
Ethical Sourcing
attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior Procurement organization ensure products are being sourced are acquired in a responsible and sustainable way People involved treated fairly and work in safe environment Environmental and societal impacts must be considered
Bottleneck
unique procurement problems. Supply risk is high and availability is low. Small number of alternative suppliers.
Pain
using a penalty or punishment as a negative outcome for poor performance, cost overruns, quality problems financial penalty, reducing future business, bill-back amaount (incremental costs resulting from poor performance)
Gain
using a reward as a positive outcomes for exceptional performance financial bonus, more business/longer contracts, share a portion of cost reductions, provide access to seminars/conferences/tools/resources, publicly recognize supplier as preferred supplier/partner/etc.
Supplier Certification
verification that supplier operates, maintains, improves, and documents effective procedures that relate to buyer's requirements _________ used to differentiate strategic supplier alliance candidates from others
Objectives of Strategic Sourcing
1. Improve the value-to-price relationship 2. Understand the category buying and management process 3. Examine supplier relationships across the entire organization. 4. Develop and implement multi-year contracts 5. Leverage the entire organization's spend
Noncritical, bottleneck, leverage, strategic
4 Sourcing Strategies
Strategic Sourcing
A comprehensive approach for locating and sourcing key suppliers, so that organization can leverage its consolidated purchasing power to find best possible values in marketplace Requires analysis of what an org buys, from whom, price, and volume Emphasis placed on entire life-cycle of product, not just initial purchase price
Reverse auctions
A sourcing technique where pre-qualified suppliers enter a website and at pre-designated time and date, and try to underbid competitors to win the buyer's business. used by private companies, public sector agencies, and non-profit organizations
Collaborative Negotiations
Both sides work together to maximize the outcome or create a win-win result. Requires open discussions and a free-flow of information between parties Establishing a relationship that works well for both parties
Spend Analysis
Collecting, cleansing, classifying, and analyzing expenditure data for the purpose of decreasing costs, improving efficiency, and monitoring compliance.
Single Sourced: innovative, high-tech, cutting edge supplier for long term partnership
Innovative Products strategy
Multi-source
Purchasing a good or service from more than one supplier. Companies may use __________ to create competition between suppliers in order to achieve higher quality and lower price.
Outsourcing
Purchasing an item/service externally, which had been produced using a company's own internal resources previously Buying an item from an external source of supply regardless of whether item had been previously produced using a company's internal resources
need more capacity, spread risk of supply disruption, create competition, more sources of info, dealing with special kinds of business
Reasons for multiple suppliers
Supply Base Rationalization (Supply Base Reduction, Supply Base Optimization)
Reduction in the supply base to the lowest number of suppliers possible without increasing risk
-Grow revenues -Reduce costs -go "green" -Manage risk -Build intangible assets (such as social and environmental responsibility)
Sustainable sourcing programs should try to
Rights and Duties
some actions are right in and of themselves regardless if the consequences
Noncritical
routine items that involve low percentage of the firms' total spend and involve very little supply risk
Distributive Negotiations
refers to a process that leads to self-interested, one-sided outcome
Strategic
____ items and services that involve high level of expenditure and are vital to firms success
Supplier Co-location
a representative of the supplier is actually embedded in buyer's purchasing department to forecast demand, monitor inventory and place orders.
Strategic Alliance
agreement between a buyer and a supplier to pursue some agreed upon objectives, while remaining independent organizations Companies agree to "share information and resources" to achieve mutual benefit Preferred suppliers are potentially ideal candidates for a _______ ______
Innovative Products
characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition
Leverage
commodity items with many alternatives, and low supply risk. Spend is high and there are potential procurement savings
Criteria for selecting supplier
cost, quality, capacity, service, location, reliability, communication capability, order system and cycle time, willingness to share info, product and process tech
Drivers of Strategic Sourcing
long-term financial performance, customer focus, product quality, cost of materials, delivery lead times, optimize global suppliers (reduction in number of suppliers), innovative products in less time and lower price
Rewarding suppliers for outstanding performance
motivates and encourages them to continue to strive for excellence fosters strong and productive supplier relationships
Single-Source
multiple potential suppliers available for product/service, but company decides to purchase from only one supplier
Insourcing
producing goods or services using a company's own internal resources
Reward incentives (examples)
promise of future business, public recognition, cash back, strategic or preferred supplier status